Cryptocurrencies

or the advent of private assets, especially Bitcoin (BTC)? – Cryptocurrencies

virtual money - Bitcoins

While the public sector has supported the global economy with trillions of dollars – deepening its difficulties for the next few years -, the preference for private assets (stocks, real estate, metals, cryptos) becomes structural. This crisis has revealed (and is revealing) trends of ideological scope; which influences the economic, financial and lately monetary choices of agents. 2021 appears to be the dawn of a new economic and financial era, where institutions as we know them today are under threat. Next year could thus reflect a transition in favor of private assets.

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Clear economic and financial trends

Financial markets under pressure?

Comparison of BTC, 10Y, Dow Jones and Gold. Source: tradingview.
Comparison of BTC, 10Y, Dow Jones and Gold. Source: tradingview.

This will likely be a feature of 2021. And we are already starting to feel it. 2020 will have been a year without any real final impact on equities, and the triggering of a low point on bond rates. The CAC40 has lost nearly 8% since January while Bitcoin (BTC) is up nearly 150% against 20% for gold.

The strong growth in money supply, accompanied by the overall economic context, will have triggered a bullish rally on Bitcoin or gold. These trends could weaken in 2021, but are expected to continue due to the intensity of the movement over time.

The financial sector remains under very strong pressure in view of the colossal readjustments which operate on the markets. For now, markets are preparing for 2021 on a bullish basis. As if the page “2020” had been turned; without actually starting to read the next page. The financial sector is highly sensitive to these main factors :

  • Interest rates and cash. A fall in bond rates due to central repurchase policies implies a relative undervaluation of equities, which end up being pushed up. If central banks continue these liquidity injections, the upside potential in stocks, cryptos or metals is reinforced. However, the latest movements tend to show that even with injections of liquidity, bonds weaken, which leads to disparities in movements (fall in gold, rally in Bitcoin and equities, etc.). In any case, liquidity and rate movements should be watched closely for the coming months.
  • Global risks. The point is, all markets are overvalued these days because savings are tapped. The fall in rates of return and the increase in the tax burden that ultimately results from indebtedness are factors in accepting risk. This leads to an ever stronger overvaluation of public assets (bonds), and therefore then private. Global risks determine investors’ decisions in the medium term.

In other words, the financial sector is pulled between short-term liquidity, medium-term risk, long-term economy. The presence of an economic risk in 2021 should confirm fairly clear movements in some markets.

2021 or the continuity of economic risk …

10-year rate differential and 3-month rate. Recession risk indicator (recessions in gray).
10-year rate differential and 3-month rate. Recession risk indicator (recessions in gray).
Source: FRED.

The vaccine is not expected to have any effect on the economy until the second half of 2021. This confirms the risk of a recession which should persist until the summer of 2021 (health measures, etc.). Risk confirmed by the long rates minus short rates indicator above. 2021 will therefore combine a structural economic risk (indebtedness, tensions on supply, fall in investment, etc.) with a health risk.

It would seem that the second half of 2021 concentrates more of an institutional risk (central and commercial banks, States). This could be explained by political changes, and especially economic changes (risk on rates, inflation and budgets at the time of the recovery) which should lead to an obvious threat to the effectiveness of monetary and fiscal policies. We will not go towards rates of -4% or -5% without immediately leaning towards an obvious systemic risk [voir article à ce sujet]. The monetary and fiscal stalemate has been amplified by this crisis. It suffices to highlight the fact that – this year – states are more dependent on debt than they are on taxpayers. For their part, debts at negative rates in the world, for example, reached new records at $ 17,000 billion; or nearly ¾ of the US federal debt (government bonds represent more than $ 80,000 billion).

The presence of monetary and budgetary risks could generate some recurring trends. The resulting rate pressures determine long and short term trends in many markets. For example, a short-term high on bond rates is often a low on gold. In the long term, a higher bond yields imply greater economic risk, and therefore a rise in gold.

To stay in the very long term, 2021 should thus open a new economic era where deficits will be indefinitely high, where potential growth will be indefinitely lower, where social tensions will be indefinitely more persistent. This emerging new economic equilibrium should complete the supremacy of the West during the 2030s and last for at least 40 years, to the benefit of technologies such as AI, Blockchain, etc.

The effects to be expected on the markets

Between hope and fear?

The fact that bonds enter a period of mild stress (the US 10-year rate is approaching 0.9%, the highest since March) generally benefits gold (long-term), cryptos, and a little to actions. The bond market is valued more than stocks and less valued than real estate. Difficulties on bonds can translate in the medium and long term a diversion towards private assets (mainly shelters and actions).

The bond risk is very real in the years to come, especially if central banks reduce their optimal support. So it may be that security demand (and yields) is strengthened. Which most certainly reflects a continuation of the global uptrend in cryptos, metals, and stocks. Obviously, the fact that (in the short term) sudden risk expectations can take effect implies possible intense corrections. In other words, the financial stress index should remain high.

Comparison between money supply, BTC, 10Y and financial stress.
Comparison between money supply, BTC, 10Y and financial stress.
Source: tradingview.

The current rally in Bitcoin is a fundamental reaction. Financial stress hit historic levels during this crisis. The stress relief that is currently operating and that we could anticipate, and a highly bullish factor in assets like Bitcoin. Thus, the future economic transfer from a private risk to an institutional risk, should cause the maintaining fairly high financial stress. This implies possible corrections (increase in stress) in a strongly bullish fund trend (fall in long-term stress and sharp rise in safe haven assets and returns).

The risks to follow in 2021 …

In view of the events that we can anticipate today, it will most certainly be necessary:

  1. To be careful on stocks and bonds until early spring due to the cumulative health risk and economic risk. The current rise in equities, for example, is fueled psychologically more than fundamentally. Structural corrections cannot be ruled out within a few months.
  2. To anticipate a possible risk phase From the end of summer 2021 (possible final exit from the covid crisis), we could see some interesting market movements. First, the german federal elections which follow could determine the ECB’s future decisions. Then there will most certainly be a risk of readjustment real rate / growth, which means upside risk on rates. Therefore, we can imagine a resumption of economic (even monetary) tensions, which historically benefits cryptos or precious metals.

So, the evolution of the virus at the very beginning of the year, central bank decisions followed by fiscal health of states will be decisive in early 2021. Next, we must expect a second risky phase for the second half of 2021. Fundamental economic readjustments, the intensity of the recovery (revised downward to + 6% by Bercy in 2021) and its effects on prices and company results, and especially the German federal election could play a major role .

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At the end of 2020, the easing of financial stress triggered the structural rally in certain cryptos that we would expect. While the markets are starting to position themselves with some optimism for 2021 (more out of wanting to forget about 2020 than to generate growth), the first tensions are being felt in markets like bond markets. The first half of 2021 should be marked by the maintenance of private risk (certainly less intense than in 2020). However, the exit from the virus which could operate, and the economic and political readjustments to come, are strongly cumulative factors on the risk (in particular public). In short, we are entering a transition phase in favor of private assets.

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